A multitude of different retirement plan types exist, offering consumers, business owners, and employees an opportunity to save money in a plan that most appropriately suits their needs, budget, and individual situation. Many retirement plan types share extremely similar characteristics, sometimes making it difficult to identify one versus the other. Having a basic knowledge of the types of plans that exist and comprehending the generalities of each one will make finding and choosing the right plan easier and much less confusing.
The most well-known retirement plan is probably the 401(k). The 403(b) plan mirrors the 401(k) almost exactly, save for identifying the organization as a non-profit entity like a church or school. Both of these plans deduct an employee-chosen contribution amount from every paycheck, and many facilitate matching deposits from the employer. These plans offer participants a list of mutual funds and sub-accounts within which their contributions are allocated. Deposits result in income tax deductions, and any account growth remains untaxed until proceeds are withdrawn.
The IRA and Roth IRA are one of the public’s most popular retirement plans for individuals. Funding for IRA’s and Roth IRA’s comes directly from the account owner and no one else. Both types of IRA plans allow a nearly unlimited number of investment options within which the account owner’s contributions can be allocated. Traditional IRA deposits result in dollar-for-dollar income tax deductions, tax-deferred growth, and fully taxable withdrawals. Roth IRA deposits, on the other hand, do not result in a current year deduction, also accumulate untaxed, yet do not result in an increase in taxable earnings for the year in which withdrawals occurred.
Annuities allow consumers to save money for retirement, but contain features and characteristics not found in any other plan. Insurance companies offer and maintain annuities, and can add attractive “living benefits” to a consumer’s account. Every insurance carrier’s annuity products differ from the next, but only slightly due to state and federal retirement account constraints.
A great many employees probably participate in and contribute to a Simple IRA, yet mistake the plan for a 401(k). Simple IRA plans are extremely similar to 401(k)’s in many ways, so much that average consumers are unlikely to notice them. Simple IRA accounts offer small employers a greater degree of flexibility and lower administrative costs, yet offer employees a list of investment choices that may match or rival those within a 401(k). Contributions into Simple IRA’s are matched by the employer according to the options chosen at the time the plan was implemented. Deposits are tax deductible, any growth is tax-deferred, and withdrawals are fully taxed.
The SEP plan, or Simplified Employee Pension, offers small business owners and self-employed individuals the opportunity to contribute more money toward their retirement than what is permitted in an ordinary IRA. Contribution limits are calculated after an analysis of the business owner’s income. All eligible deposits result in current year income tax deductions, deferred growth within the account, and full taxation on any withdrawal amounts.
Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.